NNN Rent Explained
What is triple net rent or N-N-N? Triple net rent, or N-N-N rent, is a type of commercial lease agreement where the tenant is responsible for paying all the operating expenses of the property in addition to the Base Rent. The operating expenses include property taxes, insurance premiums, and maintenance fees. This means that the tenant is responsible for all the costs associated with the property's operation and upkeep, and the landlord is only responsible for the structural components of the building. Triple net rent agreements are commonly used in commercial real estate leasing situations where landlords want to pass the property's expenses on to tenants without having to manage those expenses themselves.
What is Base rent? Base Rent in a triple net lease refers to the fixed amount of rent that the tenant pays to the landlord for the use of the property. It does not include any additional costs related to property insurance, property taxes, or maintenance expenses, which are typically paid by the tenant as additional expenses in addition to the Base Rent. The Base Rent amount is usually determined at the start of the lease and may increase over time based on the terms of the lease agreement. The Base Rent is the money that the landlord typically uses to pay the mortgage for a property or puts in its pocket.
What are operating expenses, pass-through expenses, or ‘nets’ in a triple net (N-N-N) lease?
Net #1 – Property Taxes. Property taxes are a type of tax that is levied on the value of real estate by the local government. The property tax portion of a triple net lease is typically calculated based on the assessed value of the property and the local tax rate. The tenant is responsible for paying their portion of the property taxes directly to the local government agency.
Overall, property taxes are an important consideration when it comes to triple net lease agreements, as they can significantly impact the overall cost of the lease for the tenant. It is crucial for both landlords and tenants to have a clear understanding of how property taxes are calculated and how they affect the lease agreement.
Net #2 – Property Insurance. Property insurance is a type of insurance that provides coverage for damages or losses to a property caused by specific perils such as fire, theft, vandalism, or natural disasters. Under a triple net lease, the tenant is typically responsible for paying for expenses related to the property, including property insurance. This means that the tenant would be required to maintain property insurance for the duration of the lease. The specific policy required will vary depending on the lease agreement, but property insurance can provide financial protection for both the landlord and the tenant in case of damage or loss to the property. For example, if a fire damages the building, property insurance would provide coverage for repairs or replacement. Overall, property insurance is an important part of triple net lease agreements, as it helps mitigate the risk of financial loss due to unforeseen events that could damage the property.
Net #3 – Maintenance or CAM. CAM, or Common Area Maintenance, refers to the expenses related to the operation and maintenance of common areas in a commercial property. Examples of common areas include hallways, parking lots, elevators, and lobbies. These expenses may include landscaping, parking lot maintenance, cleaning, utilities, and other repair costs. The expenses are typically shared by all tenants in the property and are often calculated based on the tenant's pro-rata share of the property's total square footage. In this type of lease, the tenant bears the risk of any unexpected expenses or repairs. CAM charges are often passed along to the tenant as additional expenses, also known as pass-through expenses, that they are responsible for paying in addition to their base rent and other triple net expenses. CAM expenses can significantly increase the tenant's overall rent, and it is essential to carefully review and understand the lease agreement before signing.
Operating expenses, pass-through expenses, and triple-net (N-N-N) expenses are generally referring to the same thing. These expenses typically change annually, from year to year, while the Base Rent usually follows the schedule outlined in the lease agreement.
So, for example, if you are a retail tenant, who is looking at a 1,500 square foot lease space, and the rent quoted to you is $35 per square foot, plus NNN (estimated at $7.45 per square foot). The math for the monthly rent would look at follows:
$35.00 + $7.45 = $42.45/SF*1,500 SF= $63,675 annual rent/12 months = $5,306.25/month.
What is a triple-net (N-N-N) reconciliation?
A triple-net reconciliation is the process of reconciling the payments made by the tenant for the operating expenses against the actual costs incurred by the landlord. These reconciliations are typically done in the first few months of the following calendar year. The reconciliation ensures that the tenant is paying their fair share of the expenses and the landlord is receiving the correct amount of revenue from the property. The triple net expenses are estimates. If the tenant overpays, there is typically a refund or credit due to the tenant. If the tenant underpays, the tenant will have a specified time to pay the outstanding balance to the landlord.
In conclusion, understanding how rent is calculated is paramount for tenants when going through the commercial lease process. It is important that tenants work with a broker who understands these concepts and calculations, in order to have an accurate understanding of annual rent. Without this understanding, the tenant can be caught off guard by the reconciliation process and owe large sums to the landlord. It’s also important to understand that the triple-net expenses are estimates, which are usually made by a property manager or owner. Good estimates are critical so that tenants aren’t hit with large expense overages during the reconciliation process in the following year.
